"Following a consultation on options for improving the Retail Prices Index (RPI), the National Statistician, Jil Matheson, has concluded that the formula used to produce the RPI does not meet international standards and recommended that a new index be published.

"The National Statistician’s consultation was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI). The ONS research programme found that use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and that this formulation does not meet current international standards. Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

"In developing her recommendations the National Statistician also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.

"Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged."

This is what I wrote on November 18:

"Dropping Carli would mean the Bank would surely have to decide this was a “fundamental and detrimental” change affecting holders of index-linked gilts and National Savings. The ONS might produce a parallel RPI, using the existing method, for investors, though that cannot be a permanent solution. The longest index-linked gilts stretch half a century into the future.

"What should happen? It is daft for the ONS to carry on using an RPI formula that comes up with obviously suspect results. From a statistical and economic perspective, the case for change is overwhelming.

"The politics, however, are trickier. Unemployment figures have never regained the public confidence there was before the Tories introduced repeated changes to them in the 1980s. The Osborne £35 billion QE "grab" has had less public impact but has a whiff of something dodgy about it.

"Anything like that has to be avoided for the RPI. If the public and the markets sense trickery, trust in the inflation numbers will disappear. Like the boy who cried wolf, once you get a reputation, it can be hard for people to believe you."

What I suggested would be unworkable in the long run has happened. So we have a very messy compromise. We will have RPI, RPIJ, not to mention RPIX (the RPI excluding mortgage interest payments). We'll also have CPI, CPIH (a new index including housing costs) and, for those who are so inclined, CPIY (excluding indirect taxes). There are others too numerous to mention.

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